MAKING THE CUT

By Jamie Hartford

At Mo’s Restaurants, a group of six coastal seafood joints based in Newport, they’re going to raise the price of the home-baked bread — two thick slices served with pats of butter — for the first time in probably 20 years.

“How much can you really charge for bread?” asks Mo’s VP Gabrielle McEntee-Wilson. “People are just not going to pay for it above a certain amount.”

But the company says it doesn’t have much of a choice. Rising food costs are threatening its profit margins, and the story is the same all over the state, where food inflation is expected to outpace sales growth by about around 2.5% this year. To stay in the black, some Oregon restaurateurs are getting creative in their efforts to increase profitability and trim the fat. Their methods: minimize supply outlay, decrease labor cost and increase menu prices. But making any operational changes is a balancing act to avoid compromising quality, sacrificing service or alienating customers.

Mo’s plans to increase the price of bread by 10 or 15 cents, in part to even out the rising cost of ingredients. The prices of wheat for flour and milk for butter rose around 50% in 2007, according to the Bureau of Labor Statistics. And it doesn’t end there. A variety of factors — higher energy and fertilizer costs, American ethanol subsidies, growing demand for protein in the developing world, and crop failures across the globe — have pushed food prices to unprecedented highs almost across the board. Last year, American consumers saw the biggest increase in retail food prices (4%) since 1990, according to the United States Department of Agriculture. But it is restaurant operators who are really feeling the pinch, says Glenn Garrett, Wilsonville-based director of business resources and development for food distributor Sysco. “Over the last 10 years, food inflation for restaurants has averaged 2.3%,” Garrett says. “Last year, it was about 6%, and the projection for the next five years is 7.5% [a year].”

And in a business where profit margins hover between 3% and 6%, and food constitutes about a third of total operating cost, even the slightest increase can have a big impact.

“Every single day we are being confronted with different price increases from all of our manufacturers,” says Kevin Bechtel, senior vice president of purchasing and menu development for Shari’s Restaurants, a chain of mid-scale family eateries based in Beaverton. Though Shari’s posted 6.5% sales growth for 2007, much of the extra revenue went to cover the rising cost of food and other products.

“Our profitability is not reflective of our sales growth,” he says. “Our sales increases, right now, are really just helping us to maintain; we’re not getting ahead.”

There’s no real end in sight, either.

“I think that we’re entering into an era where you’re going to have very strong prices for agricultural products for some time,” says Dalton Hobbs, assistant director at the Oregon Department of Agriculture. He agrees with experts who posit that the current market conditions for food products could persist for a decade or more, and it’s unlikely that prices will ever return to the levels seen in 1990s.

FOR SHARI’S 98 RESTAURANTS throughout Oregon, Washington, Idaho, California, Wyoming and Nebraska, the front line in the war on food cost is in the back of the house.

“Instead of bringing in a pallet of product, we’re bringing in a truckload of product,” Bechtel says. “Bread used to come five days per week, but to manage cost, we’ve reduced it to three days per week.”

Combining shipments, he says, helps cut packaging and transportation expenses. The chain, which has 46 locations in Oregon, is also working with management teams to pare down waste in the kitchen, but efforts to nickel-and-dime on the supply side are not enough. To maintain profits, Shari’s has increased menu prices by taking away the option of a $1.49 up-charge to add soup or salad. Those items and the extra cost are now part of all entrees.

Increasing the selection of other high-margin peripheral items, such as drinks, desserts and appetizers, has also helped, but Bechtel admits that with rising fears about the state of the economy, that is a segment where customers are likely to start cutting back.

At Mo’s, the price of bread and butter isn’t the only thing that’s going up. In anticipation of the high-traffic summer season, the company plans to raise the prices of a number of other menu items, as well.

“We watch our food costs, and we try to keep the prices as low as we can, but when they get over a certain amount, we have to raise our prices,” McEntee-Wilson says.

Customers, she says, have noticed, but there’s little else the owners can do if they want to stay profitable.

“People are looking down at the fish and chips at $15.95 and thinking, ‘Wow,’” she says.

Compounding the steep increase in food costs, McEntee-Wilson believes, is Oregon’s minimum wage, which went up 15 cents in January. It is among the highest in the nation and doesn’t allow employers to factor in a tip credit.

“It’s just kind of adding salt to the wound,” she says. “We’re not against [minimum wage increases], but it does make a difference for small business.”

Mo’s also offers its employees a health insurance plan and pays part of the premium, but if margins continue to shrink, the company might re-evaluate its policy.

“It is a discussion we have had,” McEntee-Wilson says. “For us it’s very important to have this available to people, but it is something that you have to look at.”

To avoid such measures, Mo’s, like Shari’s, has been working with suppliers to cut costs wherever they can.

“With six restaurants, you sort of have a little bit of buying power, which is wonderful,” McEntee-Wilson says.

THAT’S A BENEFIT that also has helped Restaurants Unlimited, a Seattle-based company that in July merged with Portland’s Pacific Coast Restaurants, owner and operator of 27 full-service restaurants, including Portland City Grill and Manzana Rotisserie Grill.

“We doubled the size of the company overnight, so that can give you some serious leverage,” says president and CEO Steve Stoddard. He says the company is also looking at labor-saving options, such as working with suppliers to develop customized pre-prepared soups and sauces.

But independent restaurants such as Geppetto’s in downtown Ashland don’t have that luxury. With little room for bargaining, they are at the mercy of rising food costs, and in a small town like Ashland, raising prices above competitors’ will do nothing but drive customers down the street. Instead, co-owner Ron Roth is finding other ways to save.

“I have tried to cut back on the staffing a little bit,” he says. “I’ve been scheduling one less person per day and filling in the gaps myself.”

Rich Meyer, head chef of Higgins restaurant in Portland, plans a dinner menu. Higgins is coping with rising food costs by pricing its menu accordingly. “People expect to pay more for quality,” Meyer says.

PHOTO BY LEAH NASH

It also helps that Geppetto’s grows some of its own food at a local farm. As food gets more expensive, Roth says he plans to ramp up harvests, including lettuce.

“There’s a gap in the supply where the price of lettuce will double or even triple at a time when the local stuff is in its peak,” he says. “We’re going to try to hit that gap this year.”

That kind of penny-pinching is something they don’t worry about at Higgins Restaurant & Bar, a high-end eatery in downtown Portland. Higgins was founded on a commitment to using locally produced, organic products for its Northwest regional fare, and as such, chef de cuisine Rich Meyer is accustomed to paying a premium for his inventory. The restaurant’s menu changes weekly and seasonally, with prices reflecting market value, and customers don’t seem to mind that the cost gets passed on to them.

“People expect to pay more for quality,” he says.

Higgins, though, is the exception rather than the rule. For most Oregon restaurants, rising food prices are a formidable obstacle to overcome, and they’re not going away. As operators dig in for the long haul, price increases and cost cutting are bound to remain on the menu.

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